The third and latest version of Uniswap was launched in May 2021. With each version there are new updates. Uniswap V3 is the most user-friendly and efficient of all versions. It can be difficult to understand and use the new changes in each version.
Uniswap is a decentralized exchange (DEX) market operating on the popular Ethereum blockchain. It is used to trade fungible ERC20 tokens. The Ethereum blockchain creates these tokens. New aspects of Uniswap have excited crypto enthusiasts for good reason. This version highlights the best aspects of crypto. Of better decentralization, higher security and more liquidity.
If you’re not sure what Uniswap is and how it works in crypto trading, don’t worry! In this guide you will find all the information you need explained in simple terms. We’ve delved deep into the history of the market, right from its initial launch.
What is Uniswap V3 and how is it different from V1 and V2?
Uniswap V3 is the latest version of the Uniswap protocol, launched in May 2021. Compared to the previous versions, Uniswap V3 is more capital efficient. It’s more decentralized and more secure. It also has more tiers of fees and advanced data feeds called oracles.
These allow traders to keep their assets safer. You can also watch their trading pairs with improved accuracy. There are many terms that can describe the function of Uniswap. It is a Peer to Peer Marketplace this is not controlled by a central authority.
This means that traders exchange cryptocurrencies with each other without intermediaries. A third party will never interact with their wallets and the tokens they exchange. Traders on Uniswap are Liquidity Providers (LP). This is because traders are adding more tokens to the Uniswap liquidity pool.
They do this by exchanging tokens with smart contracts. These contracts define how a liquidity pool is created. When we say pool, you may be imagining a large group of assets. In reality, each pool contains two assets. Liquidity pools track LP pricing strategies and assets.
Uniswap is also a Automated Money Maker, which is a key feature. It enables decentralization. It is also a network protocol as it is directly connected to the Ethereum blockchain.
Uniswap allows you to trade ETH with DAI, USDC, USDT, WBTC and WITH.
Uniswap V1
Uniswap was launched in November 2018. It was a proof of concept that an AMM (Automated Money Maker) DEX could work. It used simpler math equations to support LP transfers. Other DEXs use complicated mathematical equations to match traders. Several factors would affect how traders might place individual orders.
Uniswap uses mathematical formulas when pricing assets. The formula is this CFMM (Constant Function/Product Market Maker) where x*y = k (the constant). The multiplied value of two assets in one trade equals the constant.
This prevents slip. Slippage is the difference between the expected and actual price of a sale. This means a trader could make a swap with a better idea of the value they would receive. In simpler terms, Uniswap has made it easy for traders to swap ERC20 tokens. The liquidity reserve of tokens also increases in value over time.
LPs were also given value for trading. You would receive additional ERC20 tokens to trade with.
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You could also choose to burn the tokens. This means taking the tokens out of the blockchain for good. Then they distribute their value to other tokens. Either through trading or burning, LPs could contribute more liquidity with their tokens. Each exchange with this version had a fee of 0.3%. This fee flowed into the liquidity reserve.
Uniswap V2
The success of the first version proved that Uniswap would transform cryptocurrency. However, there was still room for improvement. Competition in DEXs increased. While Uniswap led the way with its proof of concept, things could get better.
ERC20 token pools
The second version enabled ERC20 – ERC20 token pools. It reduced slippage and made token swapping much easier. This also meant that LPs could exchange ERC20 tokens for other cryptocoins faster. For example, the USDC/Uniswap DAI pool became more efficient. DAI is a stablecoin on the Ethereum blockchain. It holds a near value to the US dollar.
Packaged ERC20
To further address the lack of ETH bridging, wrapped ERC20 tokens replaced native ETH. Wrapped ERC20 tokens remain pegged to the value of ETH. As a result, they remain stable in price.
flash swaps
This trading method is even faster and more convenient. It allows output tokens to reach the recipient first. Then it enforces the tokens received from the other LP.
Oracle data feeds
Oracles are connections to real information. It allows smart contracts to be more specific and secure. With an oracle, LPs can build conditions into their smart contracts. For example, you can use an oracle to find the weather forecast for the next week. Then you can set a term based on the rain forecast. Most LPs look for the average price or past price of the asset they’re trading.
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How does Uniswap V3 work?
Visual representation of Uniswap liquidity pool functionality
Uniswap V3 is the most user-friendly version because of this concentrated liquidity. As the basic concept of this version, it has made many improvements. Like the following.
Concentrated liquidity pools
It makes retail pricing more flexible. In previous versions, Uniswap could accept any price between one and infinity. This allowed for a wide range of trades to be added to Uniswap’s liquidity pools and liquidity reserve. This was inefficient as most of the trades were in the DAI pool from $0.99 to $1.01 USDC/Uniswap.
This meant that all other trades and their fees went unnoticed. In V3, an LP can choose a custom price range. Most people choose a similar price range to trade e.g. B. $0.99 to $1.01. The capital that becomes liquidity is concentrated on it. With custom price ranges came new tiers of fees. LPs could now earn a higher trading fee from higher price ranges. The fee is proportional to their liquidity contribution.
There are three fee levels per pair. They are 0.05%, 0.3% and 1.0%. Remember that V1 only had a 0.3% fee. V2 allowed the governance to turn on a 5 point fee. V3 governance can enable fees per token pool. Fees also correlate to the risk traders are taking. A new feature called Range limit orders shows how specific the price range can be. A range limit order allows an LP to contribute a single token. To do this, they can enter a price range from $1.001 to $1.002.
Active Liquidity is also a key term. It tracks LP assets with better security. Market prices of assets in token pools are updated in real time. When assets in a liquidity pool no longer price within their price range, Uniswap removes them. Liquidity shifts to one of the two assets. Then the LP can decide whether to update the price range of the assets. The LP can also hold them until the market price moves back into the desired price range.
Uniswap V3 swap
Let’s take a look at how the swap feature actually works in V3. Flash swaps are still used, allowing you to trade without delay. Check out the interface to see how easy swapping is. You can enter the amount of ETH and other cryptocurrencies to trade. You can also set a slippage tolerance and a transaction deadline. Then connect your Web3 wallet. The assets will be swapped when you set the deadline.
How do you determine how much to trade? Imagine that there is a curve between the two assets you are trading. It is between the prices from one to infinity. You can now set a price range on this curve to add liquidity. You will also receive a fee for your contribution. With the use of active liquidity, you can measure the market price of assets. This allows you to trade for a win with more efficiency.
Instead of getting LP tokens, you get non-fungible tokens (NFTs). These represent your position as an LP in the liquidity pool.
Remember how V2 allowed LPs to add conditions dependent on real data to smart contracts? The oracles of this version are even more advanced. They are TWAP (Time Weighted Average Price) oracle.
You can find the TWAP of any on-chain call for the last nine days. On-chain calls are swaps on the blockchain. You can check the prices in much more detail. The gas cost to keep an oracle running is also about 50% lower. Finally, Uniswap V3 is under a license. Previous versions were open source. This business source license protects the ecosystem around DEX. External parties cannot use the V3 code for commercial purposes.
Is Uniswap safe?
Uniswap has always been secure, but V3 has increased security. It has the same level of security as the Ethereum blockchain. It’s safer than ever and incredibly easy. There are a few downsides. Uniswap, like any other DEX, has high gas fees. LPs using Uniswap contribute to the gas demand of the Ethereum blockchain. You also risk losing crypto if you use it in volatile price ranges. Remember that their market prices are updated in token pools. You could invest in a high-yield pool for a profit, but market prices could fall quickly. Your interest in these assets would not return until the market price is restored.
These are risks that come with any cryptocurrency marketplace. It is important to remember Uniswap’s better features. Since it is decentralized, there are no servers to hack into. Uniswap stores trader funds. They are also exchanged between wallets. There is no intermediary and no risk of third parties gaining access. It also leaves all assets in the hands of the LPs. Uniswap will not hold cryptos.
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Uniswap alternatives
There is no doubt that Uniswap offers numerous advantages for those who want to take advantage of decentralized finance. However, if you’ve made it this far in the article and still seem confused as to what Uniswap is, you’re not alone.
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